Buying SPX Puts

SPX Index is between 1390 and 1365 at expiration



Buy 1 SPX 1390 Put at $25


With the SPX exercise settlement value exactly at the strike price of $1390 at expiration, the 1390 put would be at-the-money and have no value.

With SPX at the break-even point of 1365 at expiration, the 1390 put would be in-the-money and exercised.

The cash settlement amount received upon exercise would be:

$1390 (put strike price) – 1365 (settlement value) = $25 x $100 = $2,500

This amount of $2,500 is the total cost of the put.

If the SPX exercise settlement value is between 1390 and 1365 at expiration, the 1390 put will also be in-the-money and would be exercised. The cash settlement amount received, however, would be less than the total cost of the put, resulting in a partial loss for the position.

For example, say the exercise settlement value is 1375 at expiration. The cash settlement amount received upon exercise would be:

$1390 (put strike price) – 1375 (settlement value) = $15 x $100 = $1,500

SPX did decline in value, but not as much as anticipated. The put that originally cost a total of $2,500 is now worth $1,500, so the investor can recoup some of its initial purchase price and realize a partial loss.

$2,500 total premium paid for put
$1,500 cash settlement amount received at put’s exercise (or sale at intrinsic value)
$1,000 partial loss

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